CFPB report questions BNPL ethics, efficacy

Payments and retail analysts are discussing a new study by the Consumer Financial Protection Bureau (CFPB) on buy now, pay later service finance options and their influence on consumers. Buy Now, Pay Later: Market trends and consumer impacts," published Sept. 15, 2022, surveyed five U.S. BNPL market leaders: Affirm, Afterpay, Klarna, PayPal, and Zip—formerly known as Quadpay in the United States.

CFPB Director Rohit Chopra observed that BNPL providers promote their services in much the same way as credit card issuers: by offering "informercial-style payment plans." Establishing guidelines would protect borrowers, he stated, whether they use credit cards or BNPL loans. "It's critical that we understand what this product is and what it isn't," he said in a prepared statement. "In many ways, Buy Now, Pay Later is a blast from the past, but, importantly, it is supercharged for the era of e-commerce, digital surveillance, and gamification."

Chopra warned that some BNPL providers are using high-tech surveillance models, embedded in ecommerce, to harvest and monetize data, potentially luring consumers into more and more BNPL loans. This gamification of shopping and lending can promote repeat behavior, he noted.

Research highlights

Chopra thanked survey participants and researchers for commentary and data. BNPL and credit card instruments have created roughly $900 billion in outstanding debt, he stated and cited the following examples:

• Rising loan approval rates: 73 percent of applicants were approved for credit in 2021, up from 69 percent in 2020.

• Increasing late fees: 10.5 percent of unique users were charged at least one late fee in 2021, up from 7.8 percent in 2020.

• More purchases ending in returns: 13.7 percent of individual loans in 2021 had at least some portion of the order returned, up from 12.2 percent in 2020.

• Shrinking profit margins among lenders: Margins in 2021 were 1.01 percent of the total amount of loan originated, down from 1.27 percent in 2020.

Marketplace competition

Chopra acknowledged that BNPL firms are promoting marketplace competition by challenging existing players, which is healthy for the market. However, when products evade existing laws, it can create an uneven playing field, he noted, adding that competition should be based on product quality, customer service and pricing, not regulatory arbitrage. He further noted the CFPB's report identifies several examples of firms not providing the same rights and protections with BNPL as similar credit card offerings.

"Many Buy Now, Pay Later lenders are not offering the same clear set of dispute protections that credit card issuers have long been required to offer, which is creating chaos for some consumers when they return their merchandise or encounter other difficulties," Chopra said. "Many Buy Now, Pay Later lenders do not offer clear and comparable disclosures of the terms of the loan like other lenders."

Chopra additionally noted that Congress has enacted laws to address transparency and choice in consumer lending to ensure that lenders enable borrowers to repay loans while avoiding overextension. The CFPB will continue to address how the industry can develop appropriate and accurate credit reporting practices, he stated.

Chopra will discuss CFPB research on Thurs., Sept. 22, 2022, in Washington, D.C., at the Electronic Transactions Association's Fintech Policy Day, in a fireside chat with Jodie Kelley, the association's CEO.

The report is available at files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf .

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